European stocks drop ahead of German election

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LONDON (MarketWatch) — European stock markets moved lower on Friday, retreating from multiyear highs reached a day earlier, as investors opted for the sidelines ahead of the German election over the weekend.

The Stoxx Europe 600 index
SXXP, +0.03%
lost 0.3% to close at 314.20, trimming its weekly gain to 0.9%.

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The benchmark closed at the highest level since June 2008 on Thursday, spurred by euphoria that the U.S. Federal Reserve abstained from scaling back its asset-purchase program as many analysts had expected. The central bank cited rising mortgage rates and reduced federal spending as headwinds that “could slow the pace of improvement in the economy.”

“It was very surprising and disappointing for the longer term view. The markets pushed higher on the back of it, but it will only support short term,” said Richard Perry, chief market strategist at Central Markets.

“But medium term there is still room for a correction in this market and once investors start to realize why Bernanke has gone against what he basically said he would do, I think it’s going to sink in,” he added.

Tapering could, however, be back on the table as soon as next month, Federal Reserve Bank of St. Louis President James Bullard said on Bloomberg Television Friday. Bullard said the decision not to begin tapering followed weaker economic data, and that a small taper could start in October. The comments weighed on stocks in both Europe and the U.S.

German election

Investors in Europe were also wary of placing any big positions ahead of the German federal election on Sunday. One of the main questions is whether the current Angela Merkel-led CDU/CSU/FDP coalition will be re-elected, or if the conservative CDU/CSU will be forced into a broader coalition with the center-left SPD.

“There has been remarkable calm in the run up to the German elections in the Dax and the euro and there seems to be a sense of overconfidence as the markets have ignored the possible negative outcome of the elections,” said Ronnie Chopra, head of strategy at Tradenext, said in emailed comments.

“Recent polls show Merkel’s popularity declining while support for the centre-left Social Democrats has risen. The SPD is keen on further financial regulation and a financial transactions tax which would not be good news for the City and the equity markets,” he added. Read: German grand coalition draws nearer

MarketWatch/William Watts

European stocks drop on Friday.

Germany’s DAX 30 index
DAX, +0.46%
dropped 0.2% to 8,675.73, pulling back from a record close on Thursday. On the week, the index rose 2%.

Shares of RWE AG
RWE, +1.40%
lost 3.9% after the German utility firm said late Thursday that deteriorated earnings prospects have forced it to cut its dividend for this year and beyond.

On a more upbeat note, shares of J Sainsbury PLC
SBRY, +1.57%
gained 1.4% in London after Citigroup lifted the supermarkets chain to neutral from sell. The analysts said they expect to see stable margins and solid earnings expansion in the second-quarter earnings report.

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